Rising oil and chemical prices outweigh further softness in iron ore

April 16, 2015 - Weekly Pricing Pulse

The IHS Markit Materials Price Index (MPI) rose 1.2% last week, as rebounding oil and chemical prices outweighed further weakness in iron ore. Excluding chemicals, the MPI would have seen its sixth decline in seven weeks.

Iron ore and crude oil serve different end markets, but they have followed a similar narrative over the past year in being rocked by oversupply. Each is dominated by major players now battling for market share rather than profits. Saudi Arabia announced that it produced a record 10.3 million barrels oil per day in March despite rising global crude and product stocks that are likely to exceed three billion barrels by midyear. In iron ore, BHP Billiton, Rio Tinto, and Vale are all lifting production to drive out higher-cost competitors. Both markets have seen prices halve since June.

The similarities end here, however. Oil markets have found temporary stability from cuts in investment spending and the expected slowdown of US production growth. In contrast, iron ore prices have plunged 18% during the past two weeks because markets see no sign that production might be reined in. Indeed, China added to the industry's problems last week by taking steps to support its domestic industry, three-quarters of which is losing money according to its own Metallurgical Mines Association. In a market that desperately needs rationalization, this will simply prolong a recovery.

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